On January 1, Boston Company completed the following transactions (use a 7% annu

Question

On January 1, Boston Company completed the following transactions (use a 7% annual interest rate for all transactions): (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided.)

Borrowed $116,400 for nine years. Will pay $6,700 interest at the end of each year and repay the $116,400 at the end of the 9th year.

Established a plant remodeling fund of $491,050 to be available at the end of Year 10. A single sum that will grow to $491,050 will be deposited on January 1 of this year.

Agreed to pay a severance package to a discharged employee. The company will pay $75,700 at the end of the first year, $113,200 at the end of the second year, and $150,700 at the end of the third year.

Purchased a $173,500 machine on January 1 of this year for $34,700 cash. A five-year note is signed for the balance. The note will be paid in five equal year-end payments starting on December 31 of this year.

1. In transaction (a), determine the present value of the debt. (Round your answer to nearest whole dollar.)

2-a. In transaction (b), what single sum amount must the company deposit on January 1 of this year? (Round your answer to nearest whole dollar.)

2-b. What is the total amount of interest revenue that will be earned? (Round your answer to nearest whole dollar.)

3. In transaction (c), determine the present value of this obligation.

4-a. In transaction (d), what is the amount of each of the equal annual payments that will be paid on the note?

4-b. What is the total amount of interest expense that will be incurred?

Explanation / Answer

1. Present value of debt = present value of amount borrowed+present value of interest paid every year

Pesent value of amount borrowed = 116400*PV of $1 for 7% and 9 years = 116,400*0.5439 = 63,281.25

Present value of interest paid every year = 6700*PVA of $1 for 7% and 9 years = 6700*6.5152 = 43,651.84

Thus present value of debt = 63281.25+43651.84 = $106,933.09 or $106,999 (rounded off)

2a. Single sum to deposit = 491,050*PV of $1 for 7% and 10 years = 491,050*0.5083 = $249,600.72 or $249,601 (rounded off)

b. Interest revenue = 491,050 - 249,601 = $241,449

3. Present value of this obligation = 75700*PV of $1 for 7% and 1 year + 113200*PV of $1 for 6% and 2 years + 150700*PV of $1 and 3 years

= 75700*0.9346 + 113200*0.8734 + 150700*0.8163

= 292,634.51 (or 292,635 rounded off)

4a:

Equal annual payments = (173,500 - 34,700)/PVA at 7% and 5 years = 138,800/4.1002

= 33,852.01 (or 33,852 rounded off)

b. Interest expense = 33,852*5 - (173500-34700)

= $30,460

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